Wednesday, June 22, 2011

Greece: Unemployment in Q1 2011

Unemployment hit 16.2% in March 2011, continuing an upward trend that started in mid 2008 (May 2008 marked the low point at 6.6%). Not only has unemployment increased but it is getting worse: each of the last two quarters showed an almost two percentage-point drop in unemployment rates. Let us examine in more detail what is happening (for a detailed look at unemployment trends, look at my past series here). 

Begin with a snapshot of unemployment in Q1 2011. At that time, the population numbered 9.3 million, according to Greece’s Statistical Agency. Of that, almost 5 million was active in the labor force, a participation rate of 53.4%, which is almost identical to the rate in Q3 2008, before the crisis hit. The unemployment rate was 15.9%, amounting to 792,600 people. Now let us look at the demographics of those 792,600 people and also how those demographics have changed (I will compare everything with Q3 2008, the last quarter before unemployment really took off). 

Gender. There are as many men unemployed as there are women (48.5% to 51.5%). This parity, however, marks a stark deviation from recent trends. Since 2003, the ratio of males to females unemployed has been around 6 to 10, meaning that for every 6 unemployed men, there have been 10 unemployed females. Labor participation is lower for females (44%) than for males (63%), so the unemployment rate for women is much higher (19%) than for men (13%). However, if one looks at the increase in unemployment since Q3 2008, around 56% has come from men. 
Age. Around 40% of the unemployed are 30-44 years old. However, this age group also makes up 40% of the labor force, so its contribution to unemployment is proportional to its size. There is, though, a clear inverse relationship between unemployment rates and age: for those aged 15-19, the unemployment rate is 55%; for 20-24 year olds, it falls to 37%; and so on. At each age group, there is a gap between female and male unemployment, although the gap is greatest at younger ages. 

Region. Regionally, Attica (broader Athens area) retains unemployment rates below the national average (14.7% vs 15.9%), as does Thessaly, the Peloponnese and the North Aegean islands. On the other extreme are the various parts of Macedonia, the Ionian Islands and the South Aegean. Most of these trends are in line with historical norms although some areas have seen less growth in unemployment than others. 

Education. There is clear trend between more education and more employment, but there is also a clear trend between education and how much unemployment rates have changed in the crisis. In Q3 2008, unemployment and education followed a bell-curve with the lowest unemployment rates found among those with the least and among those with the most education. But the crisis has hit those with less education more: in fact, the unemployment rate for those with the least education is over the national average (to be fair, the size of this portion of the population is the smallest). Even so, the change in unemployment is highest as one goes from those with post-graduate and university degrees to those with less education. 

Labor costs. In Q2 2010 labor costs came down on a year-on-year basis (vs Q2 2009) for the first time in over a decade, and they have since continued to fall. This adjustment is crucial to restoring some competitiveness in the economy, although the trend needs to continue in coming quarters.

Saturday, June 18, 2011

Greece after a Cabinet Reshuffle

What started as a free-fall ended up as a bungee jump, and a government that seemed one the verge of collapse, regrouped, reconciled and may even survive. But besides the sheer entertainment value of seeing this roller coaster, what exactly happened over the past few days, and what does it mean? Before thinking about this reshuffle, let us review where Greece stands.

First, Greece’s agreement with the troika was premised on the country returning to the markets in 2012. That premise is effectively dead (see here). Unless Greece can secure more official aid or miraculously reverse market sentiment, it will default by March 2012. This fact cannot be changed by any revenue or tax measures unless those measures either (a) massively change market sentiment or (b) help Greece secure further official aid.

Second, Europe is very keen to help Greece avoid default, but the structure of the help is extremely contentious. German support is particularly conditional, and German Chancellor Angela Merkel faces a number of political and even legal challenges in forging a new agreement. Her plan to make a new bailout plan contingent on involving the private sector (i.e. forcing a haircut) has been fiercely resisted by the European Central Bank. She has since softened her stance, but her problems within Germany are not going away.

Third, getting further official aid is premised on presenting a coherent and credible plan, which is what the medium term strategy was meant to accomplish. The pillars of the strategy were three: (a) grow government revenues in line with GDP; (b) freeze spending at stable nominal terms such that increased interest payments are offset by a reduction in real expenditures; and (c) engage in a very extensive (though not unprecedented) privatization campaign to both raise revenue and accomplish the task of shrinking the role of the state. Together with growth at historical levels, Greece’s debt could be somehow manageable, reaching 100% of GDP by 2024, assuming historical growth rates and the maintenance of fiscal discipline.

Four, the popularity of the Greek government has been falling. The prime minister’s approval ratings continue to tumble (23% think him most suitable for this job), while frustration is growing in the streets of the country. Finding a unifying theme that frustration is difficult, but broadly speaking, it comes from three sources: (a) the frustration of insiders: the people, mostly in the public sector but sometimes in the private sector as well, who stand to lose from reforms; (b) the frustration of those who believe that this crisis was generated by cheating politicians and who are more or less repudiating the political class; and (c) the frustration of those who think that the ruling cabinet, and the prime minister in particular government, have been spineless in passing through reforms and that change is not coming rapidly enough.

Five, social tension is rising. Greece’s recession is greater than anticipated and unemployment hit 15.9% in Q1 2011, versus 10.3% when this government took office in Q4 2009 and much above the forecasted 14.5% for 2011. Violent incidents are rising and a growing disconnect – that runs two ways – between Greeks and immigrants is further threatening social cohesion. There is a growing sense that the government cannot impose order.

Six, the unity of the cabinet and the ruling party has disintegrated. There is a growing number of very public disputes between ministers and, more recently, an open mutiny against the prime minister, which included the resignation of two members of parliament. This challenge was effectively put out by the PM appointing his chief rival as the number two in the government (in reality number 3 but de facto number given a portfolio that includes the ministry of finance).

Seven, the reform agenda has reached its most crucial phase. If 2010 was the year of easier choices, then 2011 was the year when the PASOK government had to basically implement an agenda that would, for the most part, radically unsettle its own power base. This agenda revolved chiefly around shrinking the public sector both directly and through privatizing state-owned enterprises, of which some (e.g. the Public Power Corporation) boast extremely powerful unions. In effect, PASOK needed to move past being PASOK if its agenda could succeed.

Greece thus faces a deep political, economic and social crisis, and it is being navigated through that crisis by a government that is increasingly unpopular and divided, and which is failing to convince either Greeks or foreigners that it means business. As a result of this dynamic – and the extremely unfavorable math, the choices that are open to the Greek government are fairly limited, and frankly have to conform more or less to the medium strategy.

Now bring in a cabinet reshuffle. By way of disclaimer let me say that I was a big fan of the sacked finance minister. I found it sensible and component, given the circumstances. His chief offense, it seems to me, was that he did not play well with others in the government and that power was too concentrated in his hands. His offense was thus more political than anything. Given Greece’s structural and mathematical realities, the substance of future policy has little room to change.

The question is then whether the style of policy will change. In theory, this reshuffle, by closing ranks, restores some governability. But it does not resolve the underlying tension that what Greece needs is for PASOK to not be PASOK; in fact, by pulling in a major old PASOK figure, that goal is not only nullified but perhaps reversed. From the PM’s perspective, party cohesion is better than no party cohesion, and given his blunders, he may have had no other choice. From the country’s perspective, however, the challenge for PASOK is to believe there is electoral hope in a policy that challenges so much of its constituency base, and it is not clear that this will happen.

In theory, the party that is so wedded into the establishment could more easily sway its own supporters. But in practice, this is a zero sum game, and the hope rests on the government’s ability to articulate a broad message for the country’s direction that will galvanize support outside the party while maintaining a parliamentary majority. So far, no politician has been able to articulate this message, provide an honest account of how Greece got into this mess and what awaits the country on the other side. Without that, Greece’s hopes are dim, cabinet reshuffle or not.

Wednesday, June 15, 2011

The Speech the Greek PM Should Have Given

My fellow Greeks,

We have reached the moment of truth. The choice before us is between passing a medium-term strategy to try and avoid default or declare bankruptcy right away. But our decision transcends a commitment to be honorable and repay that which we owe. Our choice is about what kind of society we will become, what kind of country we will bestow to our children. Crippling debt is a symptom of our sick political system. It is a political system that my father helped to create and that those who came after him perpetuated. It was the politically convenient thing to do.

But it was a political system that was as unjust as it was unsustainable. Our crisis was made in Greece, and we lost our moral compass along the way: few businesses can settle their taxes without a bribe. Politicians live better than entrepreneurs. Professionals evade taxes and enjoy restrictions to protect their inflated fees. Public sector employees shirk work and yet get lifelong tenure; they also earn more than private sector workers. Unions think saving a job is like saving a life. Justice is slow and erratic. Dealing with doctors and hospitals can be as frustrating as illness itself. At university, party membership can land you better grades than studying hard. Meritocracy is an abstraction.

Is this the country we want to live in? We can easily go to Europe and say, no thanks, keep your money, we will restructure our debt. But saying so means that we looked at ourselves in the mirror, stared at what we could become and said "no, that's too hard." No doubt it would be better to change our country under better circumstances. But that is not our choice. Let us be frank: with no crisis there will be no change. Our past habits will not go away.

Our medium-term strategy is a fiscal plan, but it is tied to that broader vision. It is a vision that lands the initiative back to you, the Greek people, by tapping into your ingenuity, your creativity and your courage. It is a vision that says, you do good work, and we will not stand in the way. To do so we plan to shrink the state. We have tried to do too much and ended up doing very little. What we need to do - provide safety, administer justice, collect taxes - we have neglected.

I ask parliament to support this plan and I ask you to applaud those who do. Promises are cheap. Our lives will be hard and this plan will not make them better overnight. No easy choices left. These will be trying times. They will test our sense of justice: our effort to fix our finances will make us tolerate things we should not and overlook past injustices that need reckoning. Unemployment will test our compassion, especially towards those who were not born here. Our frustrations will push us to the limit and that limit will often turn violent. We will make mistakes, say things that are foolish and do things we will regret.

But we will bounce back. And we will be stronger for having done so. Our political system, our institutions and our sense of justice are at stake. Our promise and our vision is a Greece that looks nothing like the past. I ask you, my fellow Greeks, to join me in that journey.

Greece: The Day After June 15

June 15, 2011 started as a tragedy and ended as a farce. Parliament convened to debate the government’s proposed medium-term strategy, only to be confronted with protests and violence outside the parliament building. A series of intense discussions followed during which the prime minister offered to step down in favor of a government of national unity only to retract that offer in a televised address, blaming the opposition for leaking the information to the press. Instead the prime minister said he would sack his cabinet, form a new one and ask for a vote of confidence in parliament.

Unless a miracle happens, this marks the end of this administration. PM George Papandreou is counting that the Greek public and political class will prefer his (imperfect) stewardship over the turmoil of elections. He also believes there is enough popular support for his policies that the people will stand by him. The problem is that he has tried this blackmail before and it is getting tiring. During the November 2010 local elections, he threatened national elections unless the electorate voted for him – he then took an ambivalent result, declared success and put the question to rest. He has also threatened from time to time to hold a referendum – only to backtrack later. Add to that that he offered to resign to the leader of the opposition without first consulting many in his own party – only to then take it back – and he is rapidly exhausting the patience of even his allies.

Mr. Papandreou faces three problems, and a reshuffle can only resolve one. First, his cabinet includes many unwilling parties, and over the past few months there have been quite a few open disagreements about policy among his ministers. Further, ministers often implement reforms begrudgingly or not at all, as they look to shelter their own power base. Second, he faces dissent in his party more broadly. Deputies openly said they would vote down his medium strategy, and he almost certainly lacked the majority to pass it. Third, he is less and less popular with the public: just 23% think he is most suitable as prime minister, down from 41% in January. The problems are, of course, linked to each other: lack of popular support makes politicians less willing to cooperate, which in turn causes public disconnect at the slow pace of change.

Getting rid of a politician with little support in his cabinet, the parliament and the public should be good news. But this is not the whole story. For one, other politicians are barely more popular: the leader of the opposition, the most popular politician right now, gets a 35:58 positive:negative rating. Only 23% think of him as the most suitable to be prime minister. Public discontent runs deeper than disenchantment with the prime minister.

Whether this government survives or not, whether the country heads to elections, which may or may not produce a working government, the choices facing the country do not change: Greece can either keep implementing the memorandum with the IMF, carrying out a massive shrinkage of the state sector through reduced spending and a host of privatizations, or it can renegotiate its debt in the hope that this will alleviate pressure from state finances and allow it to make reforms more gradually – or, more likely, restructure debt so as to keep on life support a political, economic and social system that has failed massively. There is no other way. Plus, external help is contingent on Greece showing political will, which it is currently not, so time could run out sooner rather than later.

The broader issue, however, is that there is no politician that is yet able to stand up and articulate a coherent message of where this country needs to go and why. If I can paraphrase Aaron Sorkin in the American President, “the problem with Greek politicians isn’t that they do not get it. It’s that they can’t sell it.” If the government falls, as it may, what comes next? The choices the country confronts have not changed. The opposition’s mantra – to renegotiate the terms of the bail-out package with the IMF – can hardly be reconciled with a fiscal hole that needs filling and with the exhausted patience of the Europeans and the IMF. So the country is confronted with a path that is more or less clear but with no political steward to take it there.

Sunday, June 12, 2011

Greece’s Medium Term Strategy: 2012-2015

As Greece seeks a second bailout package to obviate the need to borrow money in 2012 and 2013, the government has unveiled more details on its medium-term strategy (2012-2015). The goal is to lower spending from 50% of GDP in 2011 to 44.8% in 2015 (a slight upward revision from the previous target of 44% in 2015). Meanwhile, revenues are expected to grow marginally from 42.6% of GDP to 43.2% of GDP in 2015. This is the cornerstone of the government’s plan and it has not changed much (see here).

Look at the plan in detail. First, the macroeconomic assumptions have changed: GDP growth has come down by ½ percentage point with a 3.5% contraction forecast for 2011 versus the previous 3% (this too was down from initial -2.6%). Together with the ½ point higher-than-expected contraction in 2010 (-4.5% actual versus -4% expected), Greece’s 2011 GDP will end up 7.8% below 2009 levels versus the initially anticipated 6.5%. Greece also lowered its 2012 growth estimate to +0.8% from a previous +1.1%. The rest of the period – 2013 to 2015 – remains unchanged (the table below shows only nominal, not real GDP).

The goal remains to bring the deficit down to 1.1% of GDP in 2015, although the targets for some of the intervening years have become slightly more aggressive. As shown in the table, Greece aims to lower its deficit from €16.6 billion in 2011 to €2.9 billion in 2015. To accomplish this fact, Greece is mostly targeting a consolidation of expenditures. Revenues are expected to grow at 3.2% a year, just slightly above the 2.8% growth in GDP. Hence, the share of revenues in GDP will increase marginally.

Spending, by contrast, is expected to remain flat in nominal terms. The main problem is a huge increase in spending for interest from €14.4 billion in 2011 to €23.4 billion in 2015. Hence, to keep spending flat, the government is mostly aiming to cut public sector wages and operating expenses for the government, followed by more modest reductions in social benefits. At the heart of that effort is the goal to shrink employment and standardize wages in the public sector: the goal is to reduce the number of public sector employees by 13%.

What happens to debt? In its latest review (March), the IMF forecast Greece’s debt-to-GDP ratio at 151% of GDP in 2015. In its 2012-2015 strategy document, the Ministry of Finance shows two additional forecasts: the baseline forecast projects debt reaching 159% of GDP, although it is not clear why this number differs from the March IMF projection. Scenario 2 includes an aggressive privatization goal (see here), and if realized, would push debt to 139% of GDP by 2015. Longer term, debt would reach 100% by 2024 assuming a 3% average growth rate; with a higher (and probably unrealistic) growth rate of 5%, debt would drop below 100% in 2021.

So what do we take from this program? First, this remains a spending-driven program and will succeed or fail in large part due to the government’s effort to restrain spending. Second, revenues are expected to rise merely in line with GDP – in which case, the continuous pressure on the government missing its revenue targets may be a bit exaggerated. Third, privatization receipts are now joining GDP growth as the most critical components of creating sustainable long-term finances. The long-term path remains very difficult, of course; but the medium strategy sets out to move the country in the right direction.

Wednesday, June 08, 2011

How on Track is the Greek Bail-Out Program?

As Greece is negotiating a second bail-out package, including perhaps a form of debt restructuring, it is worth asking, to what extent is Greece’s current program failing and in what ways?

Recession has been deeper. The May 2010 agreement between the IMF/EC/ECB and the Greek government projected a GDP drop of 4% in 2010 followed by a contraction of 2.6% in 2011. In reality, GDP dropped by 4.5%, leading to a revised forecast for 2011 at -3%. So far, in Q1 2011, GDP has dropped by 4.8% year-on-year, which makes the revised 3% contraction for 2011 seem optimistic.

Unemployment has been greater. In May 2010, unemployment was projected to hit 11.8% in 2010 and then keep rising to 14.8% in 2013 before starting to come down again slowly. In reality, unemployment hit 12.5% in 2010 with Q4 2010 unemployment topping 14.2%. The latest IMF forecasts, which put 2011 unemployment at 14.8% may prove, in retrospect, to be too optimistic.

Inflation ended up much higher. In May 2010, inflation was forecast at just 1.9% in 2010 with end-of-year inflation having fallen to 1%. In reality, yearly inflation was a much higher 4.7% with the end-of-year number being 5.2%. In fact, nominal GDP fell by €6 billion as expected – but higher inflation meant the real GDP drop was higher. In part the nominal growth in prices came from higher taxation. But the Greek government has also suggested that the IMF under-estimated the micro-economic inhibitors that would prevent prices from falling.

The current account fell as planned – at least based on some numbers. In May 2010, the current account was expected to improve from a deficit of €26.6 billion to a deficit of €19.3 billion. In reality, the initial 2009 deficit proven smaller, but the 2010 number ended up at €19.5 billion. However, that is the number quoted by the Hellenic Statistical Agency and Eurostat; the IMF and the Bank of Greece show a 2010 deficit of €24 billion (this is a discrepancy which I have yet to reconcile – and figuring this out has major implications on a bigger question, which is whether Greece’s exports are growing).

Greece’s budget deficit shrank just below the target. This is a controversial statement but bear with me. In May 2010, the troika and the Greek government signed a document that said the budget deficit of 13.6% of GDP in 2009 would shrink to 8.1% of GDP in 2010 – a swing of 5.5 percentage points. In reality, the 2009 deficit was revised up to a (final) figure of 15.4%, so Greece had to come down from a higher base. The 2010 deficit ended up at 10.5% - meaning Greece achieved a correction of 4.9 percentage points versus a target of 5.5 points, which is more or less in line with the 10% deviation between the expected GDP contraction of 4% and the actual GDP contraction of 4.5%. However, the path to that fiscal end was different that what was expected at first with revenues performing worse and expenditure cuts performing better than expected (see here). And so far in 2011, the targets were just mildly off track in April (see here).

Debt was higher than expected, but only due to a revision in historical numbers. In May 2010, debt over GDP was expected to grow from 115% in 2009 to 133% in 2010, a jump of 18 percentage points. In reality, historical debt over GDP was revised to 127.1% as unrecognized liabilities came into the budget. The debt level in 2010 ended up at 143% of GDP – a worsening of about 16 percentage points, which is less than initially forecast. The reason for that is that while the deficit proved slightly higher than expected, the GDP contraction was greater than the forecast, ending up with a deterioration in the debt level that was less than initially expected.


Stepping back, therefore, it is clear that the macroeconomic assumptions of the program proved optimistic in forecasting GDP, unemployment and inflation. As a result, the budgetary and debt targets suffered, although the debt numbers improved slightly versus the forecast as a result of a weaker economy. It is hardly fair to say that the program is a failure, although the political will and cohesion to implement the program is sagging and so it may turn into a failure later.

The program’s weakness lies not with its basic parameters but with its premise that Greece would return to the market to refinance its debt by early 2012. That failure reflects the difficulty of Greece’s initial condition, further complicated by the negative press the country has received; but it also emerges more generally from pessimistic about the Eurozone as a whole. The fact that other European countries are under the microscope makes Greece’s position more precarious and compounds the pressure under which the country has to operate. At the end, it is that pressure and market sentiment, more than a complete failure to meet targets, which lies at the heart of Greece’s need for further aid.